The Bank of Japan (BOJ) has announced that it will increase its bond purchases in an attempt to defend its yield curve control policy, which is being tested by a spike in government bond yields. The BOJ will conduct additional purchases of Japanese government bonds with tenures of more than five years and up to 10 years. This move comes after 10-year Japanese government bond yields reached 0.775%, the highest in nearly a decade and nearing the BOJ’s 1% cap. Hawkish comments in the minutes of a previous BOJ policy meeting have reignited expectations that the central bank is slowly preparing to end negative interest rates.
In July, the BOJ loosened its yield curve control policy to allow longer-term rates to move more in line with rising inflation, marking a departure from the policy enacted by the previous governor. The yield curve control policy involves the central bank targeting an interest rate and buying or selling bonds as needed to achieve that target. This policy, along with keeping short-term interest rates at -0.1%, is part of the BOJ’s efforts to combat deflation in Japan’s economy. However, despite core inflation consistently exceeding the 2% target, the BOJ has been cautious about exiting its radical stimulus due to a perceived lack of sustainable inflation.
If the Japanese yen weakens beyond 150 against the dollar, the BOJ may be forced to hike rates sooner than expected. This could lead to the unwinding of the yen carry trade and a return of Japanese capital to domestic bond markets, potentially triggering market volatility. Overall, the increase in bond purchases by the BOJ reflects the central bank’s ongoing efforts to maintain control over Japan’s bond yields and support its ultra-loose monetary policy.
